This document discusses measuring organizational performance, both financial and non-financial, in the long-run. It covers the importance of vision and mission statements in guiding long-term objectives. Non-financial measures like throughput, quality, and lead time are important to consider alongside financial metrics. Activity-based management can help optimize processes. Measuring multinational performance is challenging due to differing business environments. The balanced scorecard approach integrates measures across key areas like customers, internal processes, innovation and financials. Sample manufacturing performance indicators are also provided.

1. Chapter 20
Measuring Long-Run and
Nonfinancial Organizational
Performance
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 3)
• Explain why management should focus on
long-run performance
• Clarify the importance of a vision statement
• Contrast long-run and short-run objectives
• Explain the value of nonfinancial
performance measures
• Describe factors to consider when selecting
nonfinancial performance measures

3. Learning Objectives (2 of 3)
• Explain the importance of developing bases
for comparison for performance measures
• Explain how activity-based costing is used
in long-run performance evaluation
• Describe the difficulties in measuring
multinational performance
• Explain how a balanced scorecard is used to
measure performance

4. Learning Objectives (3 of 3)
• (Appendix 1) List the steps needed to
implement a performance measurement
system
• (Appendix 2) Identify performance
measures for manufacturing companies

5. Vision and Mission Statements
• Vision Statement
– A conceptual view of the organization’s future
that is better than its present
• Mission Statement
– Expresses the organization’s purposes
– Identifies how the organization will meets its
customers’ needs through products or services

6. Values Statement
Objective
• profitability
• market share
Subjective
• ethical behavior
• respect for others
• Reflects the organization’s culture
• Identifies fundamental beliefs about what
is important to the organization

7. Vision, Mission, Values Statements
Underlies organizational goals and objectives
Without short-run success,
there will be no long-run success
Without long-run planning,
short-run success will probably fade rapidly

8. Objectives
Short-run
• Predominantly
financial
• Effective and efficient
management of
operating, financing,
and investing activities
• Customer satisfaction
issues - quality,
delivery, service
Long-term
• Financial and
nonfinancial
• Resource investments
• Competitive position -
quality, speed of
delivery, reputation of
products/services

9. Nonfinancial Measures
Use nonfinancial measures IF:
• They can be articulated and defined
• They are relevant
• Responsibility can be assigned
• Data about measures can be gathered
• Targets about measures can be set
• Benchmarks can be established

10. Nonfinancial Measures
• Operational measures
– Administrators, customer service, human
resources
• Customer measures
– Product development, order processing,
inventory
• Soft measures
– frequency of shortages, late shipments, delivery
errors
• Employee measures
– staff turnover, staff morale

11. Nonfinancial Performance Measures
• Measure directly performance that creates
shareholder wealth
• Predict future cash flows
• Relevant to nonmanagement employees
• More timely
• Highlight problems
• Less likely to result in suboptimization

12. Nonfinancial Performance Measures
• Focus on
– long term
– processes
– outputs
– teamwork
• Cross-functional
• Benchmarked externally
• Tied to reward system

13. Selecting Nonfinancial
Performance Measures
• Identify critical success factors
– direct causes of achievement of organizational
goals and objectives
• Choose some short-run and long-run
attribute measures of critical success factors
• Use qualitative and quantitative measures
• Limit the number of measures

14. Comparison Bases
• Establish benchmark
• Assign specific responsibility
• Monitor and report at appropriate intervals

15. Performance Evaluation System
Broad
Immediate
ISSUES
Less
More
FREQUENCY
Top
management
Lower
Middle
Top
Management

16. Throughput
Nonfinancial Performance Measure
• Number of good units or quantity of
services that are produced and sold within a
specified time
• Increase throughput in time and in quality
– decrease non-value-added activities
– use flexible manufacturing systems
– use computer technology (bar code, CIM, EDI)

17. Throughput Formula
Manufacturing
Cycle
Efficiency
X
Process
Productivity
X
Process
Quality
Yield
Value-Added
Processing Time
Total Time
Total Units
Value-Added
Processing Time
Good Units
Total Units

18. Throughput Formula
Manufacturing
Cycle
Efficiency
X
Process
Productivity
X
Process
Quality
Yield
Value-Added
Processing Time
Total Time
Total Units
Value-Added
Processing Time
Good Units
Total Units
Good Units
Total Time

19. Activity-Based Management
• Increase throughput by reducing non-value-
added activities
• Minimize nonquality work
• Performance Measures
– Activities that create customer value
– Quality and Service

20. Activity-Based Management
Quality
• Measure cost of quality
• Adjust
– products design
– training
– asset acquisition and
utilization
– interaction with
suppliers and customers
Service
• Measure lead time
• Adjust
– parts (fewer,
interchangeable,
few/no engineering
changes)
– building layout

21. Multinational Performance Measures
• Adjust measures to reflect different
environments
– economic
– legal
– political
– tax
• Manager cannot control impact of
accounting standards, economic conditions,
and risks

22. Measuring Performance
• Design an effective, integrated Performance
Management System
• For example, the Balanced Scorecard

23. Balanced Scorecard
Financial
Customer
Internal
Business
Innovation
and Learning

24. Balanced Scorecard Measures
• Financial
– Shareholder-relevant issues
– Profitability
– Organizational growth
• Customer
– Lead time
– Quality
– Service
– Price
Financial
Customer
Internal
Business
Innovation
and Learning

25. Balanced Scorecard Measures
• Internal Business
– Quality
– Cycle efficiency
– Time-to-market
– On-time delivery
• Innovation and Learning
– Number of patents or copyrights
– Percentage of R&D projects that are patentable
– Time of R&D from conception to
commercialization
Financial
Customer
Internal
Business
Innovation
and Learning

26. Performance Indicator System Steps
• Recognize need for enhanced performance
indicators
• Include top management in steering committee
• Create a cross-functional implementation team
• Develop a business performance model that views
the business as a stage in the value chain
• Divide firm’s goals into environment, markets and
customers, products and lines, technology,
operations, finance, and organization/management

27. Performance Indicator System Steps
• Define critical success factors
• Assess current performance measurement
system
• Determine which current measures should be
eliminated
• Develop the performance indicator structure
• Establish the necessary underlying technology
• Reevaluate current reward system
• Ensure continual improvement

28. Sample Performance Indicators
• Design for Manufacturability
– Number and severity of engineering changes
– First pass reject rate
– Number of parts
– Percent common parts per product
– Time from design to finished project
– Number of operations per finished product
– Number of tools per finished product

29. Sample Performance Indicators
• Zero Defects
– Units scrapped by cell
– Downtime due to quality problems
– Units reworked
– Yield of finished product per raw material batch
– Time required for quality test procedures
– Time lost due to quality control
– Number of checkpoints

30. Sample Performance Indicators
• Minimize Raw and In Process Inventory
– Number and location of vendors
– Number and frequency of deliveries
– Lead time from order to delivery
– Flexibility in order quantity, delivery, variety
– Complexity of components
– Demand variation
– Forecast accuracy
– Availability/accuracy of information

31. Sample Performance Indicators
• Zero Lead Time
– Actual production time
– Queue time
– Move, setup, inspection times
– Scrap, rework, yield percentages
– Late and on-time deliveries
– Back orders
– Product mix

32. Sample Performance Indicators
• Minimize Process Time
– Number and quality of components
– Availability/ease of use of components
– Skills necessary
– Number of procedures
– Process capabilities and limitations
– Plant layout

33. Sample Performance Indicators
• Optimize Production
– Bottlenecks
– Setup time
– Lot size constraints
– Labor availability, qualifications, flexibility
– Material resources availability, lead time
– Number of distribution centers
– Volume variations
– Schedule changes

34. Questions
• Why should management focus on long-run
performance?
• What factors should be considered when
selecting nonfinancial performance
measures?
• Why is it difficult to measure multinational
performance?